24 November 2015
This article first appeared in the 2016 edition of The International Comparative Legal Guide to: Cartels & Leniency; published by Global Legal Group Ltd, London. www.iclg.co.uk
On Thursday 1 October 2015, the UK introduced a 'class action' for competition cases for the first time. Given the chequered and contested history of class actions in other jurisdictions - particularly the USA - this move has variously been viewed as either inspired or insane, depending on the side of the competition law 'village' which commentators inhabit. But is it as game changing as the (usually Cassandra-like) predictions suggest, or simply part of an emerging and increasingly effective official move to get better access to compensation for victims of competition infringements?
As with class action regimes elsewhere in the world, the effectiveness of the UK system will very much depend on how it is applied in practice. Importantly, only one court, the Competition Appeal Tribunal, will be able to hear 'competition collective proceedings' claims. The effectiveness of the regime will therefore depend crucially on the Tribunal striking the correct balance between the need to ensure compensation for cartel victims (and so making the process as 'user friendly' as possible) and fairness for all parties.
The UK regime is something of an outlier in Europe. The Tribunal is allowed to certify an action to continue on behalf of a described class of claimants rather than each claimant needing to be individually named in the case. The Tribunal's judgment can be framed to bind the defendants and anyone resident in the UK who falls within the class description and who does not actively decide to leave the class ('opt-out') within a time limit set out in the Tribunal's decision.
A 2013 European Commission Recommendation on 'collective redress' - a generic EU term for a wide range of group and class litigation procedures - urged all EU Member States to make sure they have adequate collective civil procedures to allow effective access to compensation for groups of claimants harmed by a breach of any directly effective EU law. But, the Recommendation specifically states that collective redress procedures in Europe should be on an 'opt-in' model - where all claimants to be bound by the outcome of the litigation have actively decided to join the case - rather than the UK's 'opt-out' competition 'collective proceedings' model.
The Recommendation suggests that opt-out proceedings could be appropriate in exceptional circumstances. The view has been taken in the UK that - at least for claims by consumers against cartels - opt-in proceedings are not effective. Such a UK regime existed between 2000 and 2015, allowing designated consumer bodies to bring opt-in cartel compensation claims. It was only used once in its 15 year history. In the 'soccer shirts' case - widely seen as a failure - less than 0.1% of consumers estimated to be eligible for compensation actually received it as a consequence of the action.
These new 'collective proceedings' may pave the way to a wider use of class actions, if they prove to be more effective. Indeed, class actions are used widely in non-EU jurisdictions not only in competition claims, but also in other areas of the law - environmental and financial services claims being popular choices. So it is possible that the UK experiment could be the precursor for a widening of collective redress as a European phenomenon.
What does the legislation say?
'Collective proceedings' are provided for in amendments to the 1998 Competition Act. The previous opt-in collective regime has been entirely abolished.
The Competition Act is amended by schedule 8 of the Consumer Rights Act 2015, which provides the basic framework for the UK 'class action' regime. The detail is filled in by the relevant provisions of the new Competition Appeal Tribunal Rules which were recently finally adopted after a report by Sir John Mummery, recommending a large number of changes to the previous Rules, in particular to deal with the Tribunal's new powers to hear competition damages and injunction claims.
The revised Competition Act is relatively brief on the requirements for bringing collective proceedings:
- the minimum number of claimants for the Tribunal to consider creating a set of collective proceedings is two (low by the standards of comparator common law jurisdictions, although the same as in Ontario, on whose procedure the UK is modelled);
- the person commencing proposed collective proceedings must also be the proposed representative claimant;
- the Tribunal must make a 'collective proceedings order' before those proceedings can continue as collective proceedings;
- the Tribunal may only make an order if it considers that:
- the claims are for compensation or an injunction for breach of UK or EU competition legislation;
- all of the claims in the proposed class raise the same, similar or related issues of fact or law; and
- it is just and reasonable to authorise the representative put forward in the proceedings;
- the order must include:
- the authorisation of the representative to act as such;
- a description of the class of persons being represented; and
- a designation of the proceedings as either 'opt-in' collective proceedings or 'opt-out' collective proceedings;
- if the proceedings are 'opt-out', the judgment of the Tribunal is binding on all persons within the class who:
- are 'domiciled' (ordinarily resident) in the UK on a date specified in the order; and
- do not notify the representative claimant within the time limit set by the Tribunal that their claim should not be included in the opt-out proceedings.
The Act also provides for suspension of any applicable limitation period applying to claims covered by the proposed collective proceedings until the Tribunal refuses (or later revokes) the order, or the time limit for opting out or opting in has passed. We will look at these rules more closely in a moment.
As well as providing a framework for collective litigation, the Act also now includes an express procedure allowing for settlement of potential claims on a collective basis. The Tribunal has the power to approve a settlement reached before trial if it believes it is just and reasonable to do so. The settlement can be approved even before a collective proceedings order has been made. A proposed representative 'claimant' and one or more defendants may make a joint application to the Tribunal for a draft settlement agreement between them to be approved by means of a 'collective settlement order'. The Tribunal can only make a settlement order if it finds that:
- it could have made a collective proceedings order in the same circumstances;
- it is just and reasonable for the proposed settlement representative to act in that capacity; and
- the terms of the proposed agreement are just and reasonable.
The settlement order will be publicised and - where relevant, after a period to 'opt-out' has been expired - the agreement is binding on all claimants within the class, except those who have opted out or who are not domiciled in the UK, and on the defendants who have applied for the settlement order.
So the new legislative framework sets up a regime which will allow a large number of claimants to be represented in a single action and for the grouped claim to be decided on behalf of all of them - while permitting those who do not wish to act collectively to decide not to do so. In giving express legislative support to opt-out settlements (a rarity in class action legislation), the legislation is likely to encourage non-litigation outcomes to UK class actions.
When does this happen and how does it apply to past cartels?
The amendments to the Competition Act in schedule 8 came fully into force on 1 October 2015. The schedule replaced the 'bespoke' limitation period for CAT cases in the previous version of the Competition Act - which, in essence, said that a claim had to be brought within two years of the administrative decision (CMA or European Commission) relied on by the claimants. Now the general civil limitation periods - in the Limitation Act 1980 - applying to the kind of claim brought (breach of contract, breach of statutory duty) will also apply to claims in the Tribunal.
As noted above, the schedule also introduced new limitation rules to deal with the situation where a claimant's claim could potentially fall within a class action, but later does not do so either because the collective proceedings are not ordered or because the claimant decides to opt-out. The limitation period for that claim is suspended ('tolled') during the period when the claim could still fall within the collective proceedings, so as to avoid it becoming time barred (and thus the claimant losing the right to proceed individually). If less than six months is left 'on the clock' at that point, then the limitation period is extended. This is to prevent potential claimants within the class losing their right to claim individually (if they later wish) due to the expiry of a limitation period in the meantime.
The new legislation provides that, although the substantive procedural changes come into force in relation to all competition claims, revised limitation periods in the schedule do not apply to 'claims arising' before 1 October. Instead the previous limitation regime for Tribunal proceedings will continue to apply. This may have unpredictable consequences.
Without the new 'tolling' provisions in force, it is difficult to see how the Tribunal could make an 'opt-out' collective proceedings order, since it would otherwise risk injustice to claimants who might later wish to opt-out, but found they could not do so because the time limit for their individual claim had expired in the meantime. So to what claims exactly do those new 'tolling' provisions apply?
A claim accrues (arises) when all of the facts that the claimant has to prove in order to establish the remedy they seek are in existence. So where, as will usually be the case, a claim relies on a previous finding of infringement by a competition authority - that the cartel defendants are in breach of the statutory prohibitions in the Competition Act 1998 or Articles 101 or 102 Treaty on the Functioning of the European Union (TFEU) - the claim will not arise until the date the decision becomes final as against the defendant(s). Collective proceedings based on decisions made before 1 October 2015 cannot therefore be covered by the new limitation periods - including the 'tolling' provisions. This will make it difficult to use the 'opt-out' provisions in the Act.
There is, then, a likely 'run in' period of two-three years before the full flow of collective proceedings becomes apparent in the Tribunal. Where claims are to be brought without relying on a previous administrative decision - 'stand-alone' claims - the question as to when the 'cause of action arises' will be more complex and therefore likely subject to limitation challenge by defendants. To be clearly safe from successful limitation challenge, stand-alone collective claims will probably need to rely only on facts coming into existence after September 2015. The (old) pre-October CAT limitation regime, which would otherwise apply, did not make provision for limitation in stand-alone cases: the Tribunal had no jurisdiction to hear them.
'Access to justice' - funding and costs
One of the main reasons for the apparent shortfall in consumer and SME claims against cartels - and therefore the justification for the new UK collective proceedings regime - is that the costs and risks of pursuing those claims individually outweighs the likely compensation recoverable.
How will costs be dealt with in an opt-out collective proceeding? The basic principle is that the general costs rules apply as between the representative claimant and the defendant(s), whereas those represented are not liable for the defendants' costs in any circumstances (they are not parties to the claim). If the claim is unsuccessful in whole or in part, the representative claimant will bear some or all of the defendants' litigation costs.
There are a number of ways in which the representative claimant's potential exposure to costs liability can be mitigated - for example through insuring against the risk of losing or by relying on a litigation funder to cover those costs in return for a share of the damages - and in principle the costs rules in collective proceedings should not be a greater barrier to bringing a (collective) claim than the general costs rules are to individual claimants.
The criteria which the CAT will consider, when deciding whether or not to authorise a proposed representative claimant, include whether the person putting themselves forward has a clear plan for how to conduct the collective proceedings (through to trial if necessary) and whether they have sufficient funds to meet a potential adverse costs order. It is important therefore not only in the representative's own interests but also those of the class as a whole that the arrangements covering costs are robust.
The amendments to the Competition Act introduce two variations to the general costs rules as they apply in other damages claims in England.
The first variation is that recently introduced 'damages based agreements' (DBAs), where the legal team for the representative claimant takes a fee of a percentage of the damages awarded, are not allowed in collective proceedings before the Tribunal.
However, the DBA ban only applies to the relationship between the lawyers and the representative claimants - so litigation funders may still support collective proceedings on a percentage basis. And the ban only applies narrowly to fees calculated as a percentage of damages. Lawyers may still act on a 'conditional fee' agreement: they may charge a low (or no) fee if the case is lost and an uplift on success calculated by reference to their base fee.
The second variation from the general cost rules permits the representative claimant to recover his legal costs from the award of damages paid to the class. Usually (but not inevitably) in class action jurisdictions, the award of damages will be made as a single sum representing the likely total loss suffered by the claimant class as a whole. Class members will then be given a set period (six months is not uncommon) after the award has been widely advertised to come forward to claim their share of the 'pot'.
If, after the claim period has expired, not all of the pot awarded by the Tribunal has been claimed, the Competition Act provides that the residue will be paid to the Attorney General's pro bono fund. A late amendment to the revised Act means, however, that the representative claimant may use part of the residue to cover their own legal costs in representing the class before the balance is paid to the pro bono fund.
This possibility is likely to encourage claims by consumers and SMEs, for whom the other sources of available funds to cover the adverse cost risk in competition claims against well-funded corporations are very limited. Experience in other (non-European) class action jurisdictions suggests that on average only up to 50-60% of the available 'pot' will be claimed in time by eligible class members, leaving (in most cases) a significant sum over to cover the costs of bringing the collective proceedings.
Interplay with EU competition damages rules
The EU has adopted a Directive (2014/104) to try to create a common minimum set of procedural tools in all Member States for claiming compensation from infringers of the EU competition rules. Most of the requirements of the Directive already exist in English civil procedure and so the changes required are relatively slight compared with many other Member States.
One area where change will be needed - and which could have a significant impact on how the UK collective proceedings legislation operates in practice - is in relation to the joint and several liability of members of a cartel for the whole of the loss caused by the cartel to each of those harmed.
Current English civil procedure lacks a fully watertight method of cleanly and finally settling a claim made jointly and severally with only some of the joint defendants. The rules proceed largely on the basis that a settlement is concluded with all joint defendants who will then claim a contribution as between themselves to even out any lack of equity in the way in which they have individually paid damages.
The Directive changes this position for cartel claims. It provides that, if one defendant settles with claimants, then those claimants' remaining claim must be reduced to reflect the amount of harm the settling defendant caused them. And the remaining (non-settling) defendants cannot claim a contribution from the settling defendant if they are later ordered to pay further damages to the claimants. These rules will need to be reflected in English law by December 2016 and will apply to collective proceedings as well as 'standard' competition cases.
The impact of this in collective proceedings is likely to be that incentives to settle early will increase in the face of a prima facie clear claim (for example one which follows on from a competition infringement decision). It will be possible for 'minor' defendants to escape more easily from the collective proceedings without the possibility that later developments in the litigation could mean that additional and unforeseen liabilities could arise.
Collective settlements more frequent than contested proceedings?
The incentives to settle built into the UK competition collective proceedings model are substantial enough to mean that settlements will be a - probably the - major component of the UK class action regime. Unlike the class action counterparts in North America on which it is modeled, the inclusion of express provision for settlement in the overall mechanism will have a significant impact in securing compensation for victims of competition infringements.
The collective settlement regime is, of course, closely modeled on the collective proceedings rules. But collective settlements are dealt with separately in the amended Competition Act and there are some differences in the way the two sets of provisions will apply which will have important practical effects. The main ones are:
- it is not necessary for the representative claimant to commence proceedings against any defendants before the representative and the defendant jointly apply to the Tribunal for a collective settlement order. So it would be perfectly possible for respondant(s) in administrative proceedings to begin negotiations with a likely representative - a trade or consumers association, say - at an early stage (for example at the time an infringement decision is made) and for them both to apply promptly to the Tribunal to have the draft agreement made the subject of a collective settlement order. As with collective proceedings orders, collective settlement orders can be made on an opt-in or an opt-out basis;
- the 'joint and several liability' provisions in the damages Directive (see above) mean that the incentive to settle early and escape from well founded claims will apply fully to UK collective actions. Indeed, if the Tribunal is willing to make an opt-out collective settlement order on the basis of the agreement reached, the collective settlement will deal with the settling defendant's entire liability to the class in the UK;
- unlike for awards of damages made by the Tribunal in collective proceedings, there is no requirement in the Act's collective settlement provisions for any unclaimed residue of the settlement fund - after valid and timely claims from class members and costs have been met - to be paid over to the Attorney General's pro bono fund. This should leave open the possibility that the parties agree that any unclaimed residue should revert to the defendant(s) - assuming always that the Tribunal accepts that this is just and reasonable in the circumstances. Given the usual partial take up of compensation by class members, the final cost to defendants on collective settlement will thus be substantially less than if the same amount were awarded by the Tribunal in collective proceedings.
The criteria which the Tribunal will apply to applications for collective settlement orders are almost identical to those for collective proceedings orders. Given the incentives to settle noted above, it is very likely that the Tribunal's practice in granting collective orders will be mostly developed in a settlement context rather than in fully contentious proceedings, at least in the short to medium term.
The CAT as a focus for European competition claims?
The new regime is probably the most advanced in Europe to allow groups of claimants to apply for compensation against cartels. However, opt-out classes only apply in the UK - foreign residents cannot be bound by a UK opt-out collective proceedings or settlement order and retain the ability to sue outside the UK. Is this going to be enough to make the regime attractive to defendants, for whom the ability to dispose of their whole European liability as completely and quickly as possible and move on is key?
Non-resident claimants can choose to opt-in to the UK proceedings if they wish. It should, therefore, be possible to craft a settlement agreement, in particular, which is approved by the Tribunal as opt-out for UK claimants; but which applies also as an opt-in consent judgment for those class members outside the UK. If the offer is sufficiently attractive for non-resident class members - bearing in mind that it will have been approved as just and reasonable by an authoritative specialised Tribunal - it is likely that almost all interested non-UK claimants will opt-in to claim their compensation and so not have to mount separate proceedings in other EU Member States.
Although other Member States have collective redress procedures, they are not tailored to the special needs of competition claims combining (at least in Europe) a mixture of administrative decision and civil law compensation actions. Nor are they heard before a specialist Competition Appeals Tribunal staffed not only with judges but also having economists and other wider competition professionals as 'wing' panel members. Collective proceedings in London are therefore likely to be a leading source of compensation for cartel victims in Europe.
How much impact will collective proceedings have?
There has been both considerable angst and hyperbole surrounding the introduction of UK competition class actions. Both are likely to be overdone. Although the potential number of actions is probably quite large, the 'pipeline' is likely to be relatively thin at the beginning of the new regime. Settlements are likely to outweigh contested collective proceedings - not least due to the complexities of the transitional arrangements.
Nor is it at all clear that the Tribunal will make a large number of 'opt-out' collective proceedings orders in contested cases, even if asked to do so. The system is set up to focus on consumers and small businesses claiming compensation and redress against cartels, and the Tribunal may take the view that groups of larger claimants can be adequately represented on an 'opt-in' basis.
Nevertheless, the new rules do represent part of a European sea change - not least in attitudes towards novel forms of access to redress for competition and (potentially) other forms of dispersed mass economic harm. Together with the European Commission Recommendation on collective redress, the likely success of the UK competition class action regime will spur other Member States to adopt or refine their own rules, so that victims of cartel harm can also gain effective compensation in their jurisdictions.
 Competition Act 1998 s 47B(1)
 s 47B (7)(c ) and s 47B(11)
 Commission Recommendation of 11 June 2013 on common principles for injunctive and compensatory collective redress mechanisms, OJEU L201/60, 26 July 2013
 Recommendation, para. 21
 SI 2015 no. 1648 ('CAT Rules')
 Competition Act 1998, s 47B(4) - (12)
 s 47E (4) - (6)
 s 49A and s 49B
 SI 2015, no. 1630
 Competition Act 1988 s 47E, note 6 supra
 Consumer Rights Act 2015, schedule 8, para. 8(2)
 Read v Brown (1888) 22 QBD 128
 Competition Act 1998 s 47C(8)
 OJEU, 5 December 2014, L349/1
 Directive, Article 19
 Competition Act 19998, s 49A and s 49B, depending on whether a collective proceedings order has been made at the time of settlement
 CAT Rule 94(9)(g) states that reversion of the residue to the defendants is not of itself unreasonable
 compare CAT Rules 78 and 96(6)-(11)
 Competition Act s 47B(11)(b)(i)
 s 47B(11)(b)(ii)
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